Flaherty Faces Weaker Revenue in Restoring Canada Balance

By Theophilos Argitis -
Mar 21, 2013

Canadian Finance Minister Jim
Flaherty will say in a budget today how he plans to cope with a
weakening revenue outlook that is hampering efforts to eliminate
the country’s deficit before the 2015 election.

Flaherty, who says this fiscal plan will focus on
encouraging jobs and economic growth, is facing the slowest
expansion since the 2009 recession, which may leave him short of
next year’s deficit target by about C$800 million ($780 million)
without additional cuts, according to a Bloomberg News survey of
economists.

The longest-serving Conservative finance minister in a
century is seeking to reverse a legacy of deficits that may
reach about a combined C$170 billion, even as he searches for
ways to encourage employment and investment.

“It’s trying to strike the balance between balancing the
budget in the medium term and making sure there is economic
growth,” Flaherty told reporters yesterday. “You will see that
we try to create that balance.”

Economists surveyed by Bloomberg News this month forecast
growth of 1.6 percent this year, compared with a 2 percent
projection in Flaherty’s last fiscal update in November. The
finance minister is due to deliver the budget to lawmakers at
about 4 p.m. Ottawa time.

A 1 percentage-point reduction in growth for one year
reduces revenue by C$3.9 billion in the first year and C$12.8
billion over three years, according to a formula provided by the
finance department in that update, which projected a C$26.0
billion deficit in the fiscal year ending March 31, and a C$16.5
billion gap the following year.

The deficit will probably be C$24.5 billion in the current
fiscal year, and C$17.3 billion in the fiscal year starting
April 1 without additional measures, according to the median
estimate of eight economists surveyed by Bloomberg.

Increased Liability

Complicating Flaherty’s balancing task is a C$2.4 billion
increase in the nuclear liability of Atomic Energy of Canada
Ltd., announced this week, which will show up on the
government’s bottom line for the fiscal year ending March 31.

“From a macro standpoint, this is going to be very much a
stay-the-course affair that might see a tiny bit of net
tightening, but nothing significant,” said Doug Porter, chief
economist at Bank of Montreal. “It might require a tiny bit of
snugging.”

Flaherty, who has said he hasn’t decided whether to run for
office in the next election scheduled for 2015, has pledged not
to reduce transfers to individuals and provinces, or raise taxes
other than closing loopholes, to spare most Canadians the brunt
of deficit-cutting measures.

Instead, he is zeroing in on the C$120 billion Canada’s
government spends on operating and capital expenses, which
represents less than half of his total program spending.

Cut Payroll

The governing Conservatives already have reduced the state
payroll, pledging to fire about 12,000 workers and cut another
7,000 jobs through attrition. Today’s fiscal plans may include
the findings of a newly formed cabinet committee, led by
Treasury Board President Tony Clement, delegated to uncover
additional savings.

In his November update, Flaherty projected direct program
spending excluding payments to individuals and provinces would
drop to 5.8 percent of GDP in 2015 from 6.7 percent in 2011.
That will decline further to 5.4 percent by 2017, near the
lowest in 50 years.

Lower deficits mean federal government bond issuance may
shrink to the least since before the recession. Ian Pollick at
RBC Capital Markets in Toronto is projecting sales of as low as
C$85 billion in the new fiscal year, down from about C$95
billion in the current year.

Peggy Nash, the spokeswoman for the main opposition New
Democratic Party on budget issues, said the 2015 date for
balancing the budget is “arbitrary” and the government doesn’t
need to eliminate deficits that quickly.

Promote Growth

Flaherty has also been seeking to promote growth with
revenue-neutral measures, including regulatory changes to spur
investment and reallocation of existing funds to areas such as
job training and innovation.

In a letter to Conservative Party lawmakers March 18,
Flaherty said his budget will focus on “jobs and the economy”
by addressing infrastructure and job vacancies, following up on
last year’s plan that promoted spending on energy projects. He’s
also cited manufacturing as a sector of the economy that will
receive additional help.

While total employment has increased by more than 950,000
jobs since July 2009, manufacturing jobs are still at almost the
lowest on record as factories struggle with the Canadian
dollar’s 45 percent gain over the past decade.

The higher dollar also has had a regional impact, with
manufacturing-heavy Ontario posting above national average
jobless rates in every month since 2006.

‘Persistent Strength’

“Obviously, they are concerned about the persistent
strength of the Canadian dollar,” Porter said.

Much of Canada’s expansion over the next year depends on a
shift from consumer spending, which has led growth for years, to
business investment. Bank of Canada Governor Mark Carney said
Feb. 25 the “rotation” of demand from the country’s indebted
households to businesses “is the fundamental challenge” for
the economy.

Recent evidence suggests companies are still holding back.
Canadian investment spending will increase this year at the
slowest pace since the 2009 recession, according to a Statistics
Canada survey released Feb. 27, amid sluggish global demand and
weak commodity prices.

The country’s energy producers are being hampered by a glut
of supply that has constrained Canadian oil prices, in part
because of a lack of transport routes.

The price of Western Canada Select, the benchmark heavy
crude exported from Alberta to the U.S., reached a record
discount below the price of U.S. West Texas Intermediate oil
last year.